What next for funds?

From music royalties and intellectual property to blockchain and a range of new geographical markets, there are many new ways for the Channel Islands to expand their fund offerings

For years, the Channel Islands have had strong funds offerings, attracting clients from around the world. They’ve traditionally done well in four areas – real estate, private equity, infrastructure and hedge funds. But assuming no offshore jurisdiction can rest on its laurels, do they need to up their game? 

“Yes,” is the immediate response from Geoff Cook, CEO at Jersey Finance, who’s keen to emphasise that fund offerings are already broadening on the islands. “The alternative investments sector has seen high growth over the past decade and a great deal of innovation. In a low-interest-rate environment, investors have inevitably been looking at wider options.”   

This can mean diving into uncharted waters. Recent developments include the launch of the Hipgnosis Songs Fund, a music royalty fund set up in Guernsey. James Christie, Director, Fund Services at Estera, who was involved in the Hipgnosis IPO, explains the attraction. 

“The Hipgnosis fund represents a new asset class in the listed fund sphere. It’s driven by developments in technology that have completely changed the way in which music royalties can be collected,” he says.

Craig Cordle, Group Partner at Ogier, who acted as an adviser on the Hipgnosis launch, is optimistic that these fund types will gain traction. “This is the first fund of its kind to be listed on the London Stock Exchange. The music royalties in which the fund invests are fundamentally intellectual property.”

Cordle expects to see a continued rise in these types of quasi-fund structures – for example, single-asset vehicles established to purchase one asset or to make a single opportunistic investment. “For managers with a strong track record, investors are very keen to take advantage of such strategies,” he says. 

As a variation on the Hipgnosis theme, there are strong rumours within the islands that a fund vehicle focused on visual/image rights may soon be unveiled. The islands already have a track record in intellectual property (IP), so the challenge is to develop this further. There is certainly further opportunity in this space, according to Cordle. 

“IP often creates a regular yield – and income continues to be of key importance to many investors. Hipgnosis is a great example of creating a fund around a really interesting asset class. I’m expecting to see more funds investing in IP, and funds investing in new technologies – blockchain is just the beginning.”

For a funds industry to flourish, much depends on the forward thinking of the jurisdiction in question. The Channel Islands have recently introduced new regimes – the Jersey Private Fund (JPF) and the Guernsey Private Investment Fund (PIF) – offering flexibility in terms of being open- or closed-ended and the number of asset classes that can be included.  

Emerging options 

There are plenty of other new areas of investment – Hipgnosis is one example and it’s worth remembering that Jersey famously launched the first ever Bitcoin fund a few years back.

Christie believes there may be more to come in the cryptocurrency funds area, but he suggests fund service providers in the Channel Islands adopt a cautious approach. “The jury’s still out on cryptocurrency funds, but if the market continues to grow, with more cryptocurrencies being launched, then jurisdictions will increasingly need to take a view on them.”

The Coinshares Fund I, launched in 2017, receives investment exclusively in Ether. Funds of this type will increasingly attract interest from less risk-averse investors, according to Cook.   

While the racier aspects of crypto funds might not have universal appeal, there are other, lower-octane ideas that are catching the eye. Mike Byrne, Chair of the Jersey Funds Association, is keen to expand on this. “There’s clearly an opportunity to locate impact investing funds in Jersey,” he says. “There’s the potential to develop an impact investing community here in the same way that a hedge fund community is established here already.” 

Cook agrees that the potential is there for growth in the impact investing space. “We recently carried out a review, which showed an increased interest in this area [from the high-net-worth market],” he explains. “Out of 1,900 funds, we currently have 30 social impact funds, but there’s a growing trend within the family office sector for these funds – investors want decent returns, but increasingly they want to see social good too.” 

Guernsey is particularly well placed to tap in to this increased appetite for socially responsible investing. The Guernsey Green Fund, launched earlier this year, signals the island’s intention to become the go-to international finance centre for environmentally responsible finance. It’s already been highlighted as an ‘emerging global contender’ in the inaugural Green Global Finance Centres index.

Blockchain revolution

The ‘game-changing’ impact of regtech and blockchain has been well documented in the media, but how will this help the Channel Islands’ administration of funds?

“I would say that Jersey is well advanced in using bespoke technology, but there’s certainly some way to go,” Byrne says. “It comes down to the digital talent available and whether we have the nucleus like other locations.” 

There are success stories, however. The likes of Northern Trust in Guernsey have, in collaboration with IBM, applied blockchain technology to private equity administration. Byrne believes this is a step forward, but highlights the challenges ahead – particularly with alternative asset classes, which are less immediately convertible to new technology.   

Blockchain technology itself is also identified as an area that’s interesting fund managers on the islands. “We’re increasingly seeing innovative funds that are actively looking to invest in the blockchain/regtech sector,” Cook says.   

Global prospects

When it comes to global opportunities, the US remains an attractive market for Channel Island firms and, as Geoff Cook explains, a lot of effort has gone into increasing awareness across the pond. 

“We conduct periodic reviews, and in 2018 we took a fresh look at the US market,” he says. “The feedback from conferences we attended in Boston and Miami is that we are a reliable partner that helps US investors access the European market and we want to build on that.” As a statement of intent to developing US business, Jersey Finance is to launch a New York office in 2019. 

Byrne echoes Cook’s views on potential US business opportunities. He points to representatives of the Jersey funds industry undertaking extensive road trips in the US to increase recognition of what the Channel Islands offer compared with other offshore locations. “It’s hard and there’s a long way to go in terms of increasing awareness of Jersey in the US,” Byrne says. “But it’s a huge market, so even a slightly bigger slice of that market is significant.”  

Asia is also seen as a land of opportunity for Channel Island fund providers, particularly property-oriented funds. Byrne says: “Asia is a long-term growth story and there continues to be strong interest from investors there in UK property. Jersey is recognised as an appropriate holding structure by Asian investors who want access to the mature UK market.” 

Of the emerging markets, Africa is regarded as an attractive region right now. South Africa, Nigeria and Kenya are key areas of interest and, according to Cook, we may well see more funds introduced that tap into the growth potential there.

“Investors in Africa would rather use a fund structured here, with the greater protection it offers. They are using us [the Channel Islands] as a hub to go into Africa,” he says. 

The African private equity market may be relatively new, but it’s one that’s attracting increasing interest. Byrne is equally bullish about the prospects there from a Channel Island perspective. He points to the level of commercial investing in Africa, and while that’s traditionally been through investment vehicles in Mauritius, Jersey could play a more significant role in the future.   

There seems to be no shortage of areas that could enable a more expansive fund offering – be it the US or Africa, IP funds, royalties or blockchain, social impact investing or Islamic finance. The opportunity is there for fund providers to innovate, supported by a stable and well-regulated environment.